is overpaying mortgage a good idea?

ClareFe73 · 3 October 2017 at 11:36AM

I sold my London flat a year ago making £347k profit (after stamp duty and other costs) and bought a house with the proceeds but had to get a huge mortgage as well - £283k – to achieve this. Far bigger than the mortgage I originally took out on the flat 11 years previously (£160k)
I did this because I'm earning well at the moment, need a bigger place for various reasons (no children though) and because it may well be that in 5-10 years time I will want to leave my job and take redundancy. So I thought that I should get the mortgage while I can as in the future I might not be able to raise a mortgage as I could be living off redundancy or downsizing or whatever.
I hope this was the right decision – I couldn't live in my tiny flat for another 10 years – I'm hoping that by maxing out on the mortgage (which is £1,100 at the moment and very manageable even if I go part time; and I rent out the 3rd bedroom) the larger more expensive property would be a home for me but also 'a better investment' over time. I was also advised that if I wanted to sell my flat and buy it would be better for me to go for the bigger more expensive property as it already costs so much to move - £30 for stamp duty, legal fees, estate agent fees etc.
However once I moved in I had to spend about £10k on work.
I will probably never own this house though – I would be 69 when the mortgage is paid!! And I have no intention of working in my current job til 69. It's a 25-year term.
My question is – is it still worth overpaying the mortgage? I could probably comfortably overpay by about £500 - £600 a month. I don't have an offset mortgage but I'm happy to overpay at the very least £400 a month if it means that I save money overall.
I'm thinking that in 10 years time I might sell the house and try to buy a property further out of London outright.
Or I might end up going abroad for part of the year so I could rent out at least one of the rooms in the house.
Would overpaying the mortgage mean that eventually I am in a better position to do these things? I have no other debts and I have been paying extra mortgage contributions – the maximum that is allowed – for about 4 years and will continue this.
I'm slightly worried that I've bought the house at the 'wrong' time, that prices are going down. And if the whole thing was a sound decision bearing in mind I had to spend about £40k of my equity in order to move and do the work on the house. Sorry for the long post - my main question is in bold - I am just thinking what else I can do to prepare financially for my future.

[Deleted User] · 3 October 2017 at 11:41AM

There's no simple answer. It depends on what else you can do with the money.

Can you get more on your savings than you're paying on the mortgage? Do you have adequate pension provision?

If there's nothing better you can do with the money, then yes, overpaying the mortgage will obviously benefit you.

pinknsparkly · 3 October 2017 at 2:15PM

Hi Clare,

First of all, congratulations on your new place! I hope you're very happy there for as long as you plan to live there :beer:

I popped your numbers into the MSE overpayment calculator (£283,000 mortgage, 25 year term, £1100/month repayment and £400 overpayment each month).

Assuming your interest rate remains the same for the entire length of your mortgage, then overpaying by £400/month will reduce the length of your mortgage by over 7 years and save £14,555 in interest. If you push your overpayments to £600/month (assuming your mortgage provider allows this), then you'll cut the length of your mortgage by over 9 years and save £18,902 in interest.

My answer would ALWAYS be that it is worth overpaying your mortgage, unless you can get a significantly better rate elsewhere. I completely understand your concern about house prices cooling, but you have bought the house now and so there is no point worrying about something you can't change. You say you intend to keep it for at least 5 years, which means even if there is a slight slump in house prices, hopefully they will have recovered again by the time you come to sell. I'm in the process of saving up to buy my first house at the moment and my view on houses and house prices is that I'd have to pay *something* to have a roof over my head anyway, be it rent or a mortgage. Therefore, if over the time period you plan to live in your house (say 5 years), the total cost of the mortgage INTEREST + fees + stamp duty etc minus rent you receive from a lodger if you rent out your third bedroom is less than or approximately equal to the total you'd pay to rent somewhere similar then you break even, or better. The repayment part of your mortgage payment each month (and any overpayment) is buying you a little bit more of it each month. In my view, this is essentially your savings account (albeit rather akin to a 5 year bond that you can't touch until you sell the house!). If, on top of this, the value of your house rises (I prefer to make the conservative assumption that it will neither rise nor fall) then you have extra bonus savings that you haven't had to work for. The overpayments also result in reducing the mortgage interest each month, thus widening the difference between the cost of renting vs buying.

So in short, I would say - yes make overpayments. Up to the amount the provider will allow you do fee free. If you have any additional money available to overpay with after that, then consider saving it up and making a lump sum overpayment when your fixed rate finishes (and before you remortgage, if that's what you intend to do).

ClareFe73 · 4 October 2017 at 3:04PM

Thanks
and forgive my ignorance. If I overpay for the 2 years of my fixed term - and then re-mortgage - will my monthly payment after that (assuming it's the same rate ... which i know it won't be!) be less than if I had not overpaid?
ie Can you see the benefits of overpaying each time you remortgage?
I'd rather keep it at a 25-year term and see the monthly payment drop (giving me the option to overpay if I want or need)

[Deleted User] · 4 October 2017 at 3:07PM

Assuming the same rate and term, your monthly payment would be less, as interest would be calculated on a small balance.

madvicker · 23 July 2018 at 10:49AM

pinknsparkly wrote: »

Assuming your interest rate remains the same for the entire length of your mortgage, then overpaying by £400/month will reduce the length of your mortgage by over 7 years and save £14,555 in interest. If you push your overpayments to £600/month (assuming your mortgage provider allows this), then you'll cut the length of your mortgage by over 9 years and save £18,902 in interest..

The alternative way to look at it is this: You will save up to £18,902 in interest over the next 16 years of paying off your mortgage at £600 a month. Instead, if you paid that £600 a month into a stocks and shares ISA at a market average of 8% annualised return your total interest earned over 16 years would be £118,674.33 or at a 5% annualised return it would be: £61,478.79

You could also easily liquidate your money should you need it. Of course, investing in stocks and shares is never guaranteed but the historic performance going back a century speaks for itself....

phillw · 23 July 2018 at 10:59AM

madvicker wrote: »

You could also easily liquidate your money should you need it. Of course, investing in stocks and shares is never guaranteed but the historic performance going back a century speaks for itself....

It depends on your risk profile. https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets

A well funded S&S ISA is going to block you getting means tested benefits if the worst happens, while overpayments on your mortgage are not.

Like all investments it's a gamble. It's worth trying a combination of the two.

madvicker · 23 July 2018 at 11:09AM

phillw wrote: »

It depends on your risk profile. https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets

A well funded S&S ISA is going to block you getting means tested benefits if the worst happens, while overpayments on your mortgage are not.

Like all investments it's a gamble. It's worth trying a combination of the two.

Of course, but not taking risks because of a fear of a crash is also not advised. For example: taking the lower end of 5% returns you'd end up with a pot of c£180k in 16 years time. The market would have to fall by 25% for the stocks and shares route to perform the same as overpaying on the mortgage. For comparison, the 2008 crash was a 31% drop at it's worst, 20% at its best.

is overpaying mortgage a good idea?

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free